U.S. Supreme Court to weigh Arizona's tax credit law

The U.S. Supreme Court on Monday agreed to review the constitutionality of an Arizona program that diverts state tax revenue into private-school scholarships.

The court's acceptance of the case may bode well for the tuition tax-credit program, some legal experts said, because a majority of Supreme Court justices have ruled in favor of programs that provide parents with public money to help pay for tuition at private schools.

If that trend continues, the court could declare Arizona's program constitutional, ending a decadelong court battle in the state's federal courts. Or it could send the original lawsuit back to be heard in a lower court if it agrees that constitutional questions exist.

The Supreme Court will review the case in the fall, and a decision is expected before next spring.

Opponents of the tax-credit program say the high court could still rule against Arizona's law because, unlike other school-choice programs, it distributes most of the money to students at religious schools through organizations linked to religious schools.

Arizona's private-school tuition tax-credit program gives donors a dollar-for-dollar reduction in state income taxes for annual contributions of up to $1,000. Non-profit organizations called school-tuition organizations collect the money and distribute it in the form of scholarships. Many school-tuition organizations are closely linked to a certain religion and give the majority of scholarships to schools tied to that faith or denomination.

An analysis of 2008 scholarships by The Arizona Republic found that religious schools received 93 percent of the $54 million collected by school-tuition organizations that year. In 2009, at least 91.5 percent of $52 million collected went to religious schools.

Pros and cons

At issue for the court is the way Arizona's tuition tax-credit program is carried out.

Opponents say the reality of the program is that it redirects public tax money to private, mostly religious organizations and schools, which is unconstitutional.

They were buoyed by rulings last year by the 9th U.S. Circuit Court of Appeals, which said the state's program may not meet the criteria for more secular tuition tax-credit programs already approved as constitutional by the U.S. Supreme Court. The 9th Circuit returned the program to the U.S. District Court for a full hearing, but the Supreme Court stepped in on Monday to take up the case.

"Most of the money in Arizona is awarded by school-tuition organizations affiliated with religious schools and is usable only at religious schools," attorney Paul Bender said.

The school-choice programs that the Supreme Court has ruled as constitutional were religiously neutral, said Bender, former dean of the Arizona State University law school and lead attorney for the American Civil Liberties Union, one of the advocacy groups opposing the tax-credit program.

In Ohio, for example, the Supreme Court in 2002 approved a voucher program in which the state distributes tax money to needy parents and the parents can use the money to send their child to any private school.

"The Arizona school program is religious-specific," Bender said. "You have a thumb on the scale to push the parents to send their kid to a religious school."

Supporters of the tuition tax-credit program say the tax money does not go directly to private and religious schools. Instead, donors can contribute to a variety of private-school-tuition organizations, including some secular ones, and parents decide which schools their child attends, said Jeremy Tedesco, an attorney with the Alliance Defense Fund, a Christian legal group that is helping defend the Arizona program.

"It's, 'This is where I want my money to go, and this is where I want my child to attend school,' " Tedesco said. "You also have private organizations dispensing the money."

This type of program will give the Supreme Court a chance to solidify its support of school-choice programs in other states, Tedesco said.

How we got here

Alan Brownstein, a constitutional-law professor at the University of California-Davis, said retired Supreme Court Justice Sandra Day O'Connor was the swing vote in church-state cases in years past. Her replacement, Samuel Alito, seems more inclined to support government aid for religious organizations, he said.

Arizona's program seems to fit that description. The tax credits go to donors, not churches or private schools. Also, donations go to school-tuition organizations, a third party that must by state law give to more than one school.

One factor that likely influenced the Supreme Court was a strong dissent by eight of the 27 judges on the 9th Circuit. The dissenters said that the scholarship money reaches religious schools only because many taxpayers make individual decisions and that the state does not encourage individuals to give direct aid to religious schools.

Bender acknowledged that "it would have been close to a miracle" if the Supreme Court had ignored that dissent.

But "I'm hopeful we can get the Supreme Court to be clear and say, 'Look, you cannot let religious organizations take tax revenue and distribute it on the basis of religion and tell parents you can only use it to send the kid to a religious school,' " he said.

THE TUITION TAX CREDIT

Many unknowns

Key areas that have allowed the tax-credit system to flourish with few controls:

Loose oversight. School-tuition organizations, or STOs, don't have to file audited financial statements. The Arizona Department of Revenue doesn't have resources to routinely monitor those who claim the credit or the private organizations holding the money. The non-profit STOs are unlikely to be audited; the IRS audits only about 1 percent of all non-profit tax returns annually.

Vagueness in law. The law requires 90 percent of an STO's revenue go to scholarships. Most donations come at the end of the year. So STOs routinely fail to meet the 90 percent rule in the same year. The law prohibits taxpayers from making donations for their own children but allows parents to strike deals to give to each other's children or enlist friends and family members to donate.

No penalties. The law doesn't provide any fines or punishment for STOs that fail to follow the law.

Lack of transparency. It is not clear who benefits from the scholarships. The law was billed as help for the poor, but it's unclear how often that is the case. There is no way to track performance of students or schools.